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FASB Codification Research: software revenue recognition

Softronics is a new company who has developed and is about to sell a new software product. The software is designed to be installed, configured and implemented by the customer. The software package is not a consumer item but is expected to be purchased by a variety of businesses. Software is delivered via the customer downloading the package from the Softroincs site. The software package can then be activated by a "authorization code" that will be provided by Softronics. The CEO wants to ensure that the company accurately records the software product sales in accordance with Generally Accepted Accounting Principles. The CEO asks that you research and provide the criteria that the company must meet in order to record the associated sale of the software package.

Provide to the CEO, the criteria that must be met in order to record the sale of each software package. Use the FASB Codification System website for your research. Also, reference the Accounting Standards Codification that supports your criteria.

Solution Preview

The first question is whether the software requires "modification." Your scenario indicates that the project requires configuration but the customer does it (not Softronics) so it is not part of the selling price. Therefore, the product is not customized by the seller (everyone gets the same product and then uses it as they wish). The reason this is important is that software that is customized has different rules about when to recognize the sale (substantial work is completed after the sale).

Here is the codification section needed for Softronics (cut and pasted exactly so you can see and use for reference):

FASB ASC 985-605-25-3

----start of cut and paste--------

Software Not Requiring Significant Production, Modification, or Customization

Currently Viewing:
985 Software
605 Revenue Recognition
25 Recognition
> Basic Principles
>> Software Not Requiring Significant Production, Modification, or Customization
25-3 If the arrangement does not require significant production, modification, or customization of software, revenue shall be recognized when all of the following criteria are met:

* a. Persuasive evidence of an arrangement exists (see paragraphs 985-605-25-15 ...

Solution Summary

Response is 729 words, including a portion exactly reproduced from the codification so the student can "see" how this resource is displayed and cited. Even though the citations are technical, the discussion is in everyday language suitable for novice to expert level.